Trusts and Estates: The What, Why & How of Wealth Preservation

Rachel Gil: Hi everyone, and welcome to today’s session, Trusts and Estates: The What, Why, and How of Wealth Preservation. I’m Rachel Gil, a managing director on Cresset’s family Governance and Education team, and I’m joined by my colleague Anne Paape, who leads Cresset’s Wealth Strategy team. Anne and her team support clients across Cresset’s footprint in navigating estate planning complexities and designing wealth transfer strategies to help families achieve their personal, financial, business, and charitable goals. And Anne has over 20 years of experience as an estate planning attorney, and we’re so excited to have her insights on today’s session. So, this webinar will really only scratch the surface on trust and estates. We’ll follow up with additional, more in-depth resources, but we hope you walk away with from today’s conversation with an understanding of some of the core concepts of trust and estate planning.

So, with that, let’s dive in. So, first things first, what is estate planning? An estate is essentially the value of all the assets that are owned by you as an individual. So, this could include your house, your car, jewelry, financial securities, anything of value. And estate planning is a strategy for what happens to all of these things when you die, or in the event that you become incapacitated.

So, people create estate plans for many reasons, a number of which you can see on your screen. They may want to avoid probate, which is the public and often lengthy process to validate a person’s will and administer their estate, or perhaps they want to minimize taxes or think about how they’re passing wealth to future generations, give to charities, et cetera. So, most families have some combination of these goals and estate planning professionals help families create plans that optimize for their unique goals and needs.

So, with that in mind, estate planning looks different for every person, but there are core tools that we should all be familiar with. So, beneficiary designations, powers of attorneys, wills and trusts, all of which you see on the slide. We also included prenuptial agreements. These may or may not be applicable depending on your situation. So, whether or not you’re in a relationship, do you have other protections in place, et cetera. And we won’t get into prenups today, but we do have a full webinar focused on this topic, and we’ll send that as a follow-up.

But let’s explore the other five tools. So, Anne, would love to pick your brain on these. We, you know, when we were putting together this list of tools, the one that you called out specifically to make sure that we touched on was beneficiary designation. So, I’m wondering if you can touch a little bit on what they are and why they’re really important to review an update on a regular basis.

Anne Paape: Sure. Thanks Rachel. Well, I think all of these tools are pretty important, but I agree with you that beneficiary designations tend to be something that people forget about. And when I reference beneficiary designations, it’s really any account that lists a beneficiary. So, the most common ones are going to be like your retirement accounts. When you set that up, it usually asks you, “Who would you like to be the beneficiary at your death?” Life insurance is another super common one, but then there’s other kind of hidden ones. It’s possible that when you set up a checking account, your bank asked you for a beneficiary upon your death. There might be other non-regulated retirement accounts like IRAs or other leftover accounts that you have, and in some states, some people even list beneficiaries on real estate deeds.

So, I think they’re important because they can cover really important assets. They can also get out of date really easily. So, when you set up a 401k, it usually asks you for your beneficiary, but it doesn’t ask you every year, right? It doesn’t say, are you sure that you want these beneficiaries to be the same? And it also might be that you want it to be in a trust, or you want it to be given partially to a charity. And then those beneficiary designations get a little bit more complicated, and probably need a little bit more refreshing, more commonly. And you want to make sure that they go with the rest of your estate plans. So, if you’ve done other estate planning, you don’t want this other large account to go to someone you didn’t intend. And certainly, big life events like getting married, having children, getting divorced, those are all things that require a refreshment of your beneficiary designations for sure.

Rachel Gil: Yeah, absolutely. I remember when I started my first job, I was not married or in a relationship and I listed maybe my parents as beneficiary. So now I’m in, you know, a new stage of life with husband and kids wanted to, to make those updates, to reflect where we are today.

Anne Paape: Of course.

Rachel Gil: So, the next two are our powers of attorney and healthcare directive. So, what are these tools and, and why are they critical in planning?

Anne Paape: Sure. So, when parents ask me, “My kid’s 18 or my kid’s going away to college, do they need an estate plan?” I say yes. And these are the two documents that they need hands down. And that is a financial power of attorney and what we commonly call a healthcare power of attorney. There’s a terminology used in every state that’s a little bit different. They both apply not when you’re deceased, but when you may be incapacitated. So that’s a little bit more common to talk about with elderly clients, right? They’re facing the possibility of, of sort of a permanent incapacity or a less capacitated situation, but it’s often really overlooked with young people. You could be in a car accident; you could even be out of the country. So, it does not necessarily mean that it’s some kind of permanent state. It can just be a temporary one where you needed someone to be able to make either financial or medical decisions.

And they’re separate documents on purpose because not everybody chooses those same people. And to your earlier example, Rachel, a lot of people start by naming their parents. Right, and that seems silly. Why do I need to name my parents to make healthcare decisions for me? Well, they’re not legally actually able to make decisions for you once you’ve turned 18. They’re likely to be consulted, nobody’s going to go through a traumatic experience and not ask your parents how they feel. But this document actually legally gives them or doesn’t give them, which might be just as important to you, the authority to make decisions, and certainly if you’ve got a partner that isn’t your spouse that you really want involved, these are the kind of documents that solidify that legal ability to make decisions.

A lot of states also contain things like mental healthcare directives or living wills are commonly referenced, and those are all about decisions you’d like to make and have be legally binding. So, um, if I’m in a permanent vegetative state, this is how I want to be cared for, or I want to take in fluids and food, or I don’t, and these can be really daunting decisions, and I always tell people, you don’t have to make all of those decisions, but these documents are there in case you have feelings about them. What’s most important is to name people and to commonly name backups. Financial power of attorney covers your financial decisions, things like real estate transactions or even paying a medical bill or having access to funds if you need it. Healthcare decisions cover kind of everything else personal, whether to put you in a rehab facility, to treat a certain ailment or not treat it. And those things change frequently, so these documents should change with the way that you’re feeling.

Rachel Gil: Yeah. Really important to, to have those up to date and in alignment with what’s important to you. So, looking at the other two tools we have, can you explain what a revocable trust is and why someone might want to set that up in addition to having a will?

Anne Paape: Sure. So, a will and a revocable trust both operate to kind of gather your assets, put someone in charge of them, and then tell the world where they should be divided. And as you started this webinar, those things can be a lot of different things. It can be real estate, it can be bank accounts, it can be your dog, it can be your household items. It’s really kind of everything, and your will and your revocable trust both do that. They have some important distinctions, but for the most part, they both operate that same way. A will is the only place that you can name a guardian for a minor child, so that’s an important distinction. So, everybody who has minor children really obviously need that will and the revocable trust avoids what we call probate.

Probate is, without going into deep detail, is the court supervised process that makes sure that document’s valid, make sure the person is appointed and overseen, and then that things go where they’re supposed to go. And that seems like that would be harmless, but in a lot of states, it not only costs a significant amount of money, sometimes a percentage of your state, um, it can require court appointments, and it can require court hearings. And largely it’s delay, right? So especially during COVID, some people were waiting up to a year for probate to start, which means no one had access to any funds. No one could do anything with any real estate during that whole holding period. A lot of people put in place a revocable trust because everything that’s titled there avoids that probate process.

Now, the reason to have both is not just if you want to name a guardian for a minor child, but also because you’re not always going to remember to title literally everything that you own in your revocable trust and the titling is what actually gets that accomplished. So, I think one of the questions we got before this is what are common mistakes people made? A lot of people set up a revocable trust, but actually never title anything in it. And I would say that it’s a mistake in that you could have done that and avoided the probate process, but that’s why you have a will that pours everything into the trust and makes sure that the trust still operates the way that it should. But otherwise, wills and trusts can both do tax planning, can both name people in charge, can both create trust for minors or grandchildren or other people. And it can give away the same types of property. But that privacy, that avoidance of probate can be really important and you avoid that delay, which is I think the biggest thing for people.

Rachel Gil: Yeah, absolutely. And I think what I hear from young adults as they’re kind of getting started on this process is it can feel really overwhelming to set these tools up. So, what advice would you give to someone on how they could get started?

Anne Paape: Sure. So especially on the healthcare directives and powers of attorney, if you have advisors, like Cresset does this all the time, but if you’re working with advisors your family does, I would start with them. Every state has some kind of resource that lets you fill out a financial power of attorney in a healthcare directive or a healthcare power of attorney, and I would honestly, I don’t normally say this, but I would Google and the source that I would trust would be a government source. So, when I Google “healthcare power of attorney Georgia,” if you see a source from the Department of Health of Georgia, for example, I would trust that source. Or a lot of hospital systems can give you an empty fillable kind of healthcare directive form. The states have specific financial power of attorney that’s a little bit more rigid state to state, so again, I would trust that government source a little bit more.

Sometimes it’s even embedded in the statutes, and you can literally cut and paste it, and as long as you follow that format, it’s going to be valid. Most of them need to be notarized. Some states require witnesses, so make sure you follow the execution requirements so that it’s valid, and then that you give it to someone. So, if you have a bank or a financial firm that you work with, make sure they have a copy of your financial power of attorney on file. If you have a healthcare directive, make sure that you list that on your driver’s license and that you make sure whatever healthcare system you work with has a copy in their system and then it should be valid until you replace it. So, those are usually pretty easy to find somewhere on the internet. The will and revocable trust, there are lots, increasingly numbers of tools and I wouldn’t be a good estate planning attorney if I didn’t say they aren’t all perfect and there is a lot of value going to an estate planner, even though it’s a big expense.

I remember the first time I had to do my own estate plan that I had to pay for, that I wasn’t at the law firm for. And that check hurts a little bit, but it isn’t something you have to do all the time, and it is important to help someone curate that specifically for you and to help you with the titling and the stuff that comes after. But the tools are getting better. So, if you don’t have complicated situations, especially if you don’t have children or trust that you need to create. Or you don’t have an estate that’s triggering estate tax. Lots of things like LegalZoom or free will.com. There’s lots of different tools, and our team can help point you to some really good tools if we need to. It’s a great place to start. I think it’s better to have nothing than to have, or to have something rather than nothing.

Rachel Gil: Yeah, absolutely. So, speaking to a person is always the best option. But if that’s not in the cards for you, there are some online resources that can be helpful. Good to know.

Anne Paape: And sometimes, depending on where you work, it can be an employee benefit. So, it’s something that you might not have ever looked at before, but you might get, you know, a thousand dollars credit towards getting your estate plan done with a law firm that they have a cooperation with. Or it might be that they’ve got one of these great tools to give you access to, so it’s worth looking into as an employee benefit too.

Rachel Gil: Great point. So, let’s talk about someone who used none of these tools, famed recording artist and musician Prince and fellow Minnesotan, like you, Anne, passed away a few years ago, back in 2016 without a will or any other estate planning tools in place. And what was the result of this? I know this shook the world, but also particularly shook the estate planning community.

Anne Paape: It did. So, full caveat, I live in Minneapolis, so this is very front and center, not only just because I live in Minneapolis, but I probably worked with every single law firm that’s been involved in this estate since it started nine years ago. It was just the anniversary not that long ago. So little bit of backstory that I think will help bring to life this tale: Prince was notorious for hating lawyers. So, he had been divorced several times and had done the last couple of divorces without the assistance of an attorney. So it was, he was notorious in

town for not trusting attorneys. He was also very philanthropic. So, he himself supported several charities. He had lots of household staff. He had people, that their whole livelihoods were wrapped up in supplying food and other sources for his real estate and his other staff, and a lot of charities that relied on his support. And he was usually anonymous about that. It was not public. He was a very caring, philanthropic person that cared about the community a lot. He also, this might be obvious, but a lot of the assets, a lot of his estate that you mentioned at the front end of this were things that were hard to value, right? They were things like recordings and art and his IP, his likeness, his reputation, right? The vault of songs he never released, let alone all the songs that were released, his writing credits on lots of other songs that other people sang, right?

He also had this big compound in town, and it was not just a home, but it was also a recording studio and a stage and like, who’s going to buy that? Right. So, it’s, all of that to say, when he died, he had no will and he had no revocable trust. He also had no spouse, and he had no children that were alive. He did have a child that passed away at one point, so no obvious heirs, and he was very estranged from part of his family. So, he had some siblings and half siblings that he did not speak to. So, I always say if you don’t have an estate plan, the law has written one for you. There is one, it’s just maybe not the one you chose. So, there are statutes called in intestate statutes that say if you die without a will or your will isn’t valid, then it will govern where your assets are going to pass.

So, when Prince died unexpectedly and had no legal documents in place, it determined for him where his assets were going to go, and those were to his siblings and half siblings because again, his parents were not alive, he himself didn’t have a spouse and he didn’t have descendants. So now these people that he largely didn’t speak to, let alone intend probably to benefit, have access to all of these assets that are not easy to divide or to determine how much they’re valued at. And now all of his staff and all of his charities that he cared deeply about got nothing really, and they were cut off kind of abruptly. So not only was that I think sad for the community and really affected a lot of people’s livelihoods abruptly, it also became this giant fight, right? Who is to benefit from where, and I believe even one of those beneficiaries has since died, maybe even two of them. So, because the estate is still in flux and it’s still fighting, they’re still unsure what it’s valued at, what the taxes are, any of those things. There’s then been a couple of deaths of people in the interim, and now there are new beneficiaries who are part of the chain. They’ve been fighting with the IRS about what his records and all of that are worth. The estate still operates as a museum, so the estate is taking an income. And it’s, you know, he didn’t get to choose who was in charge of that. Many celebrities have estate, Martin Luther King’s estate is still open, right? Elvis’s estate is still open because that, that estate is making money off their likeness. And that’s going to be the case forever with Prince as well. So, all of this planning, even though he detested the legal experience, it really did cut very contrary to how he lived his life. And I think it makes a lot of people in the community feel terrible, just that not only is the lack of planning making this so much harder to administer, and so much harder to get

through with the IRS and to complete things, but it’s also benefiting a bunch of family members that he probably wouldn’t have intended in cutting off a bunch of charities that he probably would’ve liked to benefit long-term. So, it’s a tall tale that’s easy to, it’s pointing out all of the bad things, right? No planning. What happens when you don’t designate where you’re going to, or even just the person who should be in charge of where things should go or be in charge of your likeness and things going forward. And then a whole bunch of assets that are hard to gather, hard to divide, hard to value. This is truly kind of an estate planning disaster.

Rachel Gil: Yeah. And I like what you said that everyone has an estate plan, it’s just a question of is it your estate plan or the state’s?

Anne Paape: Correct.

Rachel Gil:  So really being intentional and thoughtful around these things that might seem daunting could bring some reassurance to you and your family in the long run.

Anne Paape: Absolutely.

Rachel Gil:  Let’s dive into trusts. I know we’ve only got a few minutes left, but I want to dive into trusts just briefly on kind of who the key players are, what the responsibilities are. And I think as we think about trusts, there are three primary roles within a trust. So, there’s the grantor who sets up the trust, the trustee who manages it, and the beneficiary who benefits from a trust. And we’ll explore the latter two, and for someone who is a beneficiary, can you walk us through what are some of the key responsibilities or what should they know as a beneficiary?

Anne Paape: Sure. So, this is of course, presuming that these are trusts that you’re aware of. In many states, there are rules that require you to be aware of them at a certain point. There are some states that allow for secret or private trusts, but we’re going to assume that we’re talking about ones that everybody’s aware of. I often meet with young beneficiaries and say, this is what it means to be part of a trust, and this is where your responsibilities are because it seems like you’re just a recipient, but really you do have some responsibilities as a beneficiary. I would say it starts with understanding what the purpose of the trust is. Is it a trust that’s meant to be short-term and to benefit you or to hold out until a certain age where they believe that you might have a little bit more financial literacy so that you can manage your own funds? Or is it meant to be very long-term? Today, when I started practicing, there were only so many funds you could put in a trust that lasted more than 25 or 50 years.

Today, people can set up perpetual trusts and they can contain lots and lots and lots of dollars. So, it’s meant to accumulate and benefits several generations from you. That’s an important distinction to know as a beneficiary, is this trust short-term and just for me, is it short-term and kind of what we call a pot trust? So, is it for me and all my siblings, is it for me and my future descendants that aren’t alive yet, but I really still need to think about them? Or is it for the next five generations of descendants that I certainly will never meet, but my responsibility might mean making sure there’s something there left for those people. The other thing I would say it’s important to understand: what’s it invested in? You may or may not be privy to the details of those investments, but does it contain family things like cabins and family businesses that operate, that other people make decisions about? Or is it truly your decision or is it marketable securities? And then you should understand kind of the composition of that account. Make sure that it feels like it’s performing how it should, and it is your ability as a beneficiary to kind of ask those questions and to say, not that you know better than the trustee, because truly it’s the trustee’s responsibility to monitor those investments.

But I think it’s important for you to ask questions about how things are invested and to understand what it’s gaining, because for example, if it’s earning  5% income every year and it’s meant to last several generations, that’s where you can take a gauge from what’s appropriate for me to ask as a distribution. It’s probably just that income because again, the point of the trust is to last several generations. So that’s where it’s a mixture of knowledge, questions you should ask, and just truly your responsibility to think about the other people who are going to come after you. But if it’s something that’s short-term, not super tax efficient, it is a good thing to start distributing or using in your generation. That’s also important, obviously, for you to know.

Rachel Gil: Yeah. And you touched on understanding the investments is really the responsibility, or understanding what the trust holds, is the responsibility of the trustee, which some people play both roles, beneficiary and trustee. So, can you dive in a little bit more? What should a trustee know and what are their responsibilities?

Anne Paape: And especially in a lot of family situations, those hats get mixed up, right? There’s maybe one person who’s the trustee and also one of the beneficiaries, or it might be another family member, or it might be someone with similar trust that’s the trustee. So, the trustee is truly a fiduciary, and what that means legally is that they have to be managing the trust in the best interests of the beneficiaries instead of themselves. So that means you can’t commingle things with your own funds, it means you really can’t do things called self-dealing, which is kind of investing in your own stuff. Like if you own a company and you’re a trustee, you can’t invest the whole trust in your company. There’s rules around making sure that you’ve got boundaries and that you’re thinking in the best interest of that beneficiary where that can get gray, right? And if you’re both, if you’re wearing both hats, it’s hard to remember what hat do I have on today? Is it beneficiary versus fiduciary? And that’s what we’re here, and other advisors are here, to help you navigate because there really is pretty strict rules. It’s a big job. You’ve got to do a lot of bookkeeping; you’ve got to do a lot of oversight of investments and distribution decisions. Because it isn’t just that immediate beneficiary that cares. It can be a beneficiary 50 years from now that says you did some things that were inappropriate and as a result, I have less available to me. And you do really have to be held accountable for that. So, it’s a big job. It’s why sometimes people hire professionals, right? We talked a little bit about what’s the difference between a corporate trustee and an individual. That’s where I would say there’s insurance; there’s professionalism around the policies. There’s true boundaries because it’s not their money, right? There’s no gray. When you have a professional, and a lot of people pair the two where there’s a person, someone who’s really familiar with the family, and you can also find professionals that are really familiar with your family, that have worked with your family for a long time. But I would not underestimate the size of that job as a trustee. There are a lot of requirements. There are a lot of trusts that require you to diversify portfolios, you can’t hold things like concentrations of real estate, and it’s really important to understand and you’re subject to federal tax rules, federal laws, federal case laws, state laws, state statutes, county things. So, you have to really have your finger on a lot of things, and it changes, so it can be a big job to be a trustee, and it can also be the best way to educate that beneficiary or that future generation about what it means to manage these funds.

Rachel Gil: Yeah, and it is a big job and I know a lot of people can feel overwhelmed by the responsibilities, but I think it’s important to just highlight what you mentioned, that you can pair the two so the personal trustee could partner with a corporate trustee or someone else to take on a lot of the administration, keeping up with tax laws, that sort of thing, to relieve some of that burden from the trustee.

Anne Paape: Right, exactly.

Rachel Gil: One of the responsibilities of a trustee is making distributions or making those decisions, which is, you know, as a beneficiary you might receive distributions or money from the trust and the how, when, and for what purpose depends on the terms of the trust and specifically, the distribution standards. So, we have distribution standards on the slide in front of you, and can you walk us through the various standards and why families might opt for different ones?

Anne Paape: Sure. So, because we don’t have all the time in the world, and I could literally talk about this all afternoon, there are tax and non-tax considerations to why distribution standards are the way that they are. So, it’s rare these days where families have curated specific things. Sometimes you look at an old trust and it will be very specific about, please distribute $10 a month for this or for this type of a thing. These days it’s much more common to use some of these basic objectives, and there again can be tax and non-tax reasons for them.

So absolute discretion is pretty common, which is exactly how it sounds. It gives the trustee absolute discretion to give zero distributions or to distribute almost the entire trust. In some ways, they still need to consider the needs of other beneficiaries. The performance of the assets, the liquidity, the taxes, all of that. But it otherwise gives them discretion. It can be helpful if there’s like a special needs child or kids that need different amounts or if we’re really working with something complicated like a family business. The most common one is this, health, education, support and maintenance. Those are words that have very defined meanings. They are tax related. I won’t go into why, but it basically means that you can be a fiduciary and also a beneficiary. It gives that kind of boundary. And there have been hundreds and hundreds of cases that help us understand what those words mean. Support and maintenance are pretty synonymous. They basically mean that they’re there to continue the relative support that the trust can manage and that you received before. So, I always use the example of your parents aren’t going to put money in a trust and now all of a sudden, you’re entitled to a Ferrari unless you also got a Ferrari when they were alive, right? There can be some really large trust with these distribution standards, but often it means it’s very measured. It’s considering the tax ramifications and it’s making sure that it lasts as long as it needs to. Health is pretty self-explanatory. Same with education. They’re broader than what they might seem. It’s things like health insurance covering health issues. It can be health retreats, it can be all kinds of things, and some people may want to limit like, they may not want it to include things like alcohol and drug rehab, for example, is a common question I get from clients.

Truly, it is included in that health, but some people feel strongly that it should or it shouldn’t include that, or they want it defined what it should include. Education is things like books, room and board, study abroad. Lots and lots of broad stuff, but again, it’s really about how big is the trust? What kind of assets are in it, what can it withstand? What tax rate is the trust paying versus what tax rate do the beneficiaries pay? Those are all the considerations the trustee should use, along with those words inside the trust to really govern where those distributions should be made.

Rachel Gil: Yeah. And you’ve touched on this, but I know a lot of the questions that we receive is about tax implications and how do we optimize to minimize taxes? And so, as you think about that, what, what trust vehicles would you recommend from a tax efficiency standpoint?

Anne Paape: The most of these, in the context of an estate plan, are going to minimize estate and gift taxes. That is a future tax. That is not a today tax. That is not a, “I sell my business.” Those are all income tax issues. Most of these vehicles are set up to solve for reduction in estate tax, which is a 40% tax at the federal level, and in many states it’s 10 to 15%. So, this is not a low tax. And it is why trust can last several generations because they’re not necessarily being cannibalized with taxes. If at every generation it took a 40% scoop out of it, there’d be a lot less left at the end, right?

So, most of these vehicles are set to shelter from the estate in the gift tax from an income tax perspective, trust, pay taxes, just like you and I do, and actually they hit the top rate at the state and federal level. Faster than you and I would. So, whereas we might need to earn $250,000 a year to pay the top tax rate, a trust only needs to earn $12,000 a year to hit that top tax rate. So, sometimes it can be very efficient to make distributions because distributions carry out taxes to the person receiving them, so then they’re paying at that person’s own rate, and that can be a good tax advantage way to deal from an income tax perspective. Aside from all of that, there are certain types of trusts that help from an income tax perspective. There’s some capturing of income tax exemptions, like qualified small business stock. Not going to get into that today, but it can be a super powerful tool before you have a transaction for a business. It can also be a way to spread around income among several people and to also spread around the tax implications of that income. It can be to spread out the impact of a sale and get installment treatment on something. And it can also be to have it be taxed in a state that’s a little bit less tax heavy, like a lot of states like California and New York and where I’m from, Minnesota, Illinois, those are all paying their own income tax at the state level. And you can really make a trust live in a lot of other jurisdictions, so somewhere like South Dakota or Delaware or Florida where there is no income tax. So, a blend of all of those things is commonly how we come up with the right trust to fit the right situation. But I think the most common misconception is that there’s a million income tax TA trust reasons, and many trusts are set up with not an income tax play in mind. It’s much more about saving that future estate tax, which can be super powerful too.

Rachel Gil: I think for all the reasons you just shared, that is why we love working with professionals who understand this world because there are many ways that work for the right people, depending on their scenarios. So, I want to thank everyone for joining us today. Thank you for your time and your engagement, and we look forward to connecting with you in the future.